Tax Planning : Secure Your Finances While Switching Jobs

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Tax Planning While Switching Jobs
Tax Planning While Switching Jobs

We live in times where the probability of an individual being associated with an organization for decades or till retirement is history. Switching to a high rewarding job has become essential for accelerating pace of one’s career growth in this dynamic environment. Tax planning should be given due consideration at this time to save one from financial trouble in the future.

Some of the primary reasons behind switching jobs are:

  • Better Compensation
  • Career Growth
  • Work life Balance
  • Company Culture

In this article we will try to explain the tax impact which arises due to job switches and need for efficient tax planning.

Before we jump into the tax implications, we will try to understand the basic elements of taxation rules followed in India.

Taxation – 101

  • Financial year in India starts from 1st April and ends on 31st March of next year
  • Tax Regimes: There are 2 types of tax regimes followed in India.
    • Old Tax regime – Tax payers will get tax breaks/exemptions towards certain expenses and investments made by them
    • New Tax regime – Starting 1st Apr 2023, only standard deduction is available
  • Tax Slabs: Tax slabs followed for both regimes are different (refer the below table for FY 2023-24)
Tax Slabs as Per Old and New Tax Regime

Employees should select the tax regime which is beneficial for them by calculating the tax liability between both regimes and will have to notify their employers. Failing to do so, new tax regime will be considered as the default tax regime applicable.

Employers are expected to calculate the tax liability based on the tax regime selected by the employees and will have to deduct the appropriate amount of tax. This deducted amount needs to be deposited within stipulated timelines provided by the Income tax department.

Now that we know the basics of Income tax, lets now jump back to the main purpose of the article.

Job-Switch Scenarios

During job switches we might encounter 2 scenarios:

  1. Job Switch would be in line with the financial year i.e., if an individual ends his tenure with the old organisation on 31st March and starts his job with new organization on 1st April. This will not be an issue and will not have tax implications as well.
  2. Job Switch in the middle of the financial year i.e., Any situation other than what is mentioned in scenario 1. This is going to be the focus area of this article.

Simplest way to understand a problem is with an example and we will do the same now.

Employee NameAjay
Tax RegimeOld
Old OrganisationABC
Annual CTC with Old Organisation15 Lakhs
Date of Leaving30th Sep 2023
Eligible Deductions and Exemptions2 Lakhs
New OrganisationXYZ
Annual CTC with New Organisation20 Lakhs
Eligible Deductions and Exemptions3 Lakhs

Tax Computation in Old Organization – ABC

In the above example, organization ABC is expected to first compute the taxable income of Ajay from 1st April 2023 to 30th Sep 2023 and then calculate the tax liability on the same and deduct it.

Total Income for 6 months7,50,000
Less: Standard Deductions50,000
Less: Eligible Deductions and Exemptions2,00,000
Taxable Income5,00,000
Tax Calculation 
0 to 2.5 Lakhs0
2.5 to 5 Lakhs @ 5%12,500
Total Tax (Excluding Cess)12,500

While calculating the tax as per old regime, initial 2.5 lakhs would be exempted from tax and on the excess tax would be applied and tax liability will be calculated. In the above example organization ABC will deduct 12,500 as the tax liability.

Tax Computation in New Organization – XYZ

Lets now move on along with Ajay and see how tax is calculated in organization XYZ.

Before joining organisation XYZ, Ajay would have already shared his annual income and last few months (3 or 6) with the HR department of organisation XYZ. Inspite of this, when Ajay joins XYZ, he is expected to declare the taxable income from previous employer with the Finance Department of XYZ.

Failing to do so, finance department of XYZ will consider that Ajay was not earning any income in the current financial year, prior to joining XYZ and will calculate tax accordingly. In case, Ajay declares the taxable income from ABC, finance department of XYZ will calculate the tax accurately. Let’s look at both scenarios below

Previous Employer Income Not Declared
Total Income for 6 Months10,00,000
Less: Standard Deduction50,000
Less: Eligible Deductions and Exemptions with ABC3,00,000
Taxable Income6,50,000
Tax Calculation 
0 to 2.5 Lakhs0
2.5 to 5 Lakhs @ 5%12,500
5 to 6.5 Lakhs @ 20%30,000
Total Tax (Excluding Cess)42,500

If no prior income is declared, then the tax liability will be calculated as Rs.42,500.

Previous Employer Income Declared
Total Income for 610,00,000
Add: Taxable Income from Previous Employer5,00,000
Total Income15,00,000
Less: Standard Deduction0
Less: Eligible Deductions and Exemptions with XYZ3,00,000
Taxable Income12,00,000
Tax Calculation 
0 to 2.5 Lakhs0
2.5 to 5 Lakhs @ 5% i.e., 2,50,000 * 5%12,500
5 to 10 Lakhs @ 20% i.e., 5,00,000 * 20%1,00,000
Above 10 Lakhs @ 30% i.e., 2,00,000 * 30%60,000
Total Tax (Excluding Cess)1,72,500
Tax Deducted by Previous Employer – ABC12,500
Tax to be deducted by New Employer – XYZ1,60,000

When the income from previous employer is declared, total tax liability will be calculated as 1,72,500 and tax deducted by previous employer will also be considered to arrive at the final amount of Rs. 1,60,000.

ScenarioTax Deducted
Previous Employer Income Not Declared42,500
Previous Employer Income Declared1,60,000
Difference to be paid by Ajay during Tax Filing1,17,500

Tax impact of not declaring income from previous employer (Inefficient Tax Planning)

Not declaring income of the previous employer with the new employer can prove to be a costly affair and big amount of money will have to be shelled out during the tax filing period. In the above example, Ajay will have to pay an amount of Rs. 1,17,500 + interest on account of late payment during tax filing.

From my interaction with my clients, I understand that some of the organizations are being proactive and insisting on procuring the income from previous employer and tax details from employee and considering this for tax calculation. However, not all are following this process. So, the responsibility to declare this and accurate tax calculation falls on the shoulder of the employee. “Ignorance of the law is no excuse”.

Hope you found this article useful. If yes, please do share it with your friends and family and help them avoiding such costly mistakes.

If you need any further information, do not hesitate to contact us.

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